Table of contents
1. A worldwide shortage
Modern life is intertwined with electronic hardware, from household appliances to the supercomputers that are the brains behind our national infrastructure. They are all made possible by microchips: the workhorses of the technological world. Microchips are built up from a series of semiconductors known as transistors, which act as switches. These switches are the foundation from which computational tasks are performed.
Society’s reliance on microchips has led to increased attention on the supply chains underpinning their production. During the Covid-19 pandemic, shutdowns around the world created a microchip shortage. A major slow-down in electronic goods production followed, with car makers and telecoms among the sectors affected. The war in Ukraine has since caused a reduction in the availability of neon gas, which is essential for microchip production, threatening to prolong this shortage.
International tensions have the potential to spark more severe future microchip shortages. Taiwan and South Korea, dominant in microchip manufacture, have ongoing international disputes with China and North Korea respectively. Some analysts believe greater diversification of production is needed to ensure continued supply in the event of any escalation of these conflicts.
2. The global supply chain
The microchip supply chain is complex with no single country able to perform all stages of the process independently. The principal raw component is pure silicone found in quartz rocks. Silicone is mined across the world with the US, South Korea, Germany and Japan the biggest four exporters.
The pandemic-induced shortages highlighted a limited resilience in microchip manufacturing. Design is mostly controlled by US-based companies that outsource manufacturing to reduce capital investment. Two companies, Taiwan’s TSMC and South Korea’s Samsung, dominate this manufacturing. TSMC alone accounts for 55% of global production and is even more dominant for high-end chips.
Western nations are vying for a larger slice of the microchip manufacturing industry. The EU hopes to double its global share to 20% by 2030 with investment from the European Chips Act. The US has a similar CHIPS for America Act providing $39bn of investment over five years. The UK government’s Department for Business, Energy and Industrial Strategy (BEIS) stated in its UK innovation strategy that it will review “the support the government already gives to the sector”. However, Wyn Meredith, director of the Wales-based Compound Semiconductor Centre, said the UK risks “falling between the cracks” of large investments in the US and EU.
China also aims to become more self-sufficient in microchip production. Its policies include tax breaks for manufacturers and, as part of the “made in China 2025” strategy, it hopes to produce 70% of its own demand by 2025. However, a greater challenge for China is acquiring the expertise needed to manufacture high-end chips. The Taiwanese Investigation Bureau has alleged that Beijing is engaging in espionage to infiltrate the Taiwanese semi-conductor industry and poach its experts.
3. Production geopolitics
Some politicians have argued that overreliance on Asia for microchip manufacture is a national security issue. In a speech in March 2022, US President Joe Biden said that resilient supply chains ensure “we’re never at the mercy of other countries for critical goods”. To support this ambition, President Biden said that his administration would create new rules allowing it to pay more for US-made goods critical to national security, including semiconductors.
Analysts have suggested that the risks associated with the current supply chain are overstated. The US and its allied nations and regions—Japan, Europe, Taiwan and South Korea—currently account for 92% of the microchip supply chain compared to China’s 6%. Taiwan has prioritised its relationship with the US ahead of business interests by suspending microchip shipments to Chinese telecoms giant Huawei. Chi-hung Wei, assistant professor at the Institute of European and American Studies, has argued that global interdependence in the technology sector reduces the likelihood of conflict.
Taiwan has invested in microchip production partly to improve its own domestic security. Analysts believe China’s dependence on Taiwan for semiconductors is a deterrent against invasion, often described as Taiwan’s “silicone shield”. Some western politicians believe, therefore, that preventing Beijing’s ambitions for semiconductor independence is pivotal to curtailing a more aggressive Chinese foreign policy.
4. Foreign ownership
In addition to microchip manufacturing, debate has also raged over ownership. In 2021, Newport Wafer Fab (NWF), the UK’s largest microchip manufacturer, was bought by Chinese-owned Nexperia. Some politicians, including Sir Iain Duncan Smith (Conservative MP for Chingford and Woodford Green), have voiced concerns about the takeover. Concerns included that it handed control of a crucial part of the microchip supply chain to a competitor state and risked intellectual property being moved abroad.
Some UK politicians have argued that the government should retrospectively revoke the takeover of NWF using the National Security and Investment Act 2021. However, the prime minister, Boris Johnson, has said the government needed to judge if NWF was producing goods with “intellectual property value and interest to China”. Mr Johnson said that he had referred the takeover to his national security adviser (NSA). However, in March 2022 the House of Commons Foreign Affairs Committee concluded that the NSA had not yet reviewed the case. Writing in the Times newspaper, Conservative chair of the committee Tom Tugendhat said that giving “the Chinese Communist Party the means to further control global tech erodes our future”.
Some US politicians have also been critical of the takeover. Nine Republican congressmen, including the ranking member of the House of Representatives foreign affairs committee, Michael McCaul, have demanded the takeover be overturned. They also urged President Biden to review the UK’s status on the ‘white list’, which allows UK firms to avoid screening for certain investments in US companies.
The government has stated that the business secretary, Kwasi Kwarteng, will review and decide whether to reverse the takeover under the powers of the National Security and Investment Act. Answering an oral question on the subject in April 2022, Minister at the Department for Business, Energy and Industrial Strategy Lord Callanan said that he could not comment on “the details of a quasi-judicial decision”. Lord Callanan also informed the House that the Department for Digital, Culture, Media and Sport was working on a semiconductor strategy “to be published shortly”.